Kam Fong Chan

Dividend persistence and dividend behaviour

This article demonstrates how a spurious regression problem caused by dividend persistence is compounded by a spurious correlation problem when the dependent and independent variables in dividend behaviour regressions are ratios composed of common component variables. This article utilises a simulation procedure to take account of these problems, with the findings implying that extreme care should be taken when using ratios as predictor or explanatory variables in time series regression. This article introduces a reformulated Lintner first difference dividend behaviour model that is not subject to spurious regression in which past prices predict subsequent changes in dividends.

Buy Equities in Winter and Sell in May in Pre-Election Years: Market Premiums and Political Uncertainty in the Presidential Cycle

This study shows that since 1927, investors would have earned a statistically significant excess return of nearly two percent per month by investing in the U.S. equity market from November through April in presidential pre-election years. On the other hand, Treasury bond returns performed inversely to the equity returns, i.e., they have been higher in summer (May to October) months and in other-than-pre-election-years (especially in midterm election years). Our equity results suggest that the previously documented Halloween and pre-election year effects are intertwined. The combined Halloween–pre-election year effect shows up consistently in sub-periods; in an extended sample period since 1871; and in international stock markets. It appears to be separate from a January anomaly; it is independent of the political party in the White House; and it doesn’t appear to be a compensation for higher risk. In contrast, small (value) stocks outperform large (growth) stocks in the November–to–April period in years other than presidential pre-election years. We show that the winter–pre-election year premiums align with the Baker et al. (2016) measure of economic policy uncertainty, and we propose that models of political uncertainty potentially explain both the equity and bond results.

The Presidential Puzzle: Democrats, Macroeconomic News and Equity and Bond Premiums on Announcement Days

Recent empirical finance literature reports a sizable equity premium on two types of days. The first is under Democratic administrations. The second is on scheduled macroeconomic news announcement days. The current study unifies the two strands of literature by documenting that statistically significant and economically large announcement-day U.S. equity premiums have been limited to periods of Democratic administration between 1964 and 2015. On announcement days in Republican administrations, the estimated equity premium accompanying news announcements was negligible. The Democratic announcement-day equity premium was consistently positive in sub-periods; it showed up in international markets; it increased as election day approached; it appeared to be stronger for announcements in successive Democratic administrations; and it was bigger for medium and large market cap stocks than for small market caps stocks on announcement days, even though small stocks have in general beaten large stocks under Democratic presidents. At the same time, we show that FOMC announcements in the 1990-2015 sub-period were associated with positive equity premiums in both Democratic (Clinton and Obama) and Republican (G.W. Bush) administrations; and also that macroeconomic announcements impacted Treasury bond returns primarily in Republican administrations.